Iterations: Finding Your Signal In The Noise Of Fundraising

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Editor’s Note:Semil Shah is an EIR with Javelin Venture Partners and has been an official contributor to TechCrunch since January 2011. You can follow him on Twitter at @semil.

There’s no shortage of blog posts, message threads, and Coupa- & Creamery-inspired banter around the topic of fundraising for early-stage startups. And, as nearly every founder knows all too well, the mantra is “always be fundraising.” And yet, at the same time, something doesn’t feel quite right with respect to the manner in which investors and founders court each other today, what with the sheer number of companies spawned weekly, the amount of capital sloshing around, and ultimately, the time that is lost building and selling products because of inefficiencies in the inevitably torturous process of raising Series A financing.

With all of this in mind, I’ve been trying to observe what first-time, early-stage founders who are potential candidates for Series A funding truly want in an investment partner. The following post isn’t scientific or data-driven in nature, and naturally, each startup (and investor) is like its own snowflake, unique in their own special ways. The following isn’t directly prescriptive, either. What do I know, right? Instead, I tried to apply the most basic framework within four categories for what a founder might consider, at a high level, as he or she embarks on this process, assuming the investment size and terms were suitable:

One, Style of Engagement. Broadly defined, as a founder, how do you expect to engage with a potential investor in terms of frequency, board dynamics, and tone? Some investors at this stage prefer to be hands-on, and some founders want that. Some, in turn, definitely do not. Some founders may not fully understand the myriad demands on their potential investor’s time, which could lead to misaligned expectations. And, for many first-time founders, they may want their investor to help coach them to improve as CEO. Specifically, on this dimension of engagement, a founder may ask:

Do I expect a potential investor to be hands-on, or to be available “on-demand,” within reason?

Do I believe a potential investor will allocate a reasonable amount of time to spend on this company, given other commitments?

Do I expect a potential investor to help coach me to become a better CEO?

Two, Moving the Needle. For nearly every company contending for Series A financing, there are a few key talent hires and/or customer/partnership milestones that could affect the arc of the enterprise. A fast-growing technology company could pick the right VP of Engineering who is able to attract an army of excellent recruits, or a mobile e-commerce company could win the endorsement of the right celebrity that perfect fits their brand and initial target markets. As a founder approaches Series A, some questions he or she may ask on this dimension are:

If your company needs to hire engineers fast, will a potential investor be able to help you build a quality team?

If your company would benefit greatly by winning a key account, key customer, or key partnership, will a potential investor be able to help your company ink those commitments?

Three, Mindshare and Credibility. Nowadays, even in spaces that seem to have higher-than-average barriers to entry, the competitive is not only stiff, it’s wide and numerous. Oftentimes, founders who emerge from the seed stage to tackle Series A may also find a few other companies nipping at their heels, usually differentiated by something as slight as a business model tweak or as deep as a fundamental approach to serving users or customers. While it may be fashionable to mock PR in general and rely on product, in some cases even gentle nudging by the right investor can elevate the mindshare of a certain company and get inserted into a conversation. Beyond this lift, a founder may want to specifically target a new set of investors for the next round, and hopes their Series A investor will help them get there. Broad questions for founders to consider in this category are:

Are you operating in a highly-competitive and/or highly-crowded space, and if so, will a potential investor be able to help your company gain increased mindshare?

As your company’s future financing needs evolve, will your Series A investor help position you to the right mix of future investment partners?

And, Four, The Unknown Unknowns. We all have a plan until we get punched in the face, right? There will undoubtedly be those exhilarating or painful twists and turns, the heightened board expectations, and so many more things that you may, as a founder, want someone at the table who can help guide you and the company through these times. Some questions founders may ponder in this dimension are:

Will I respond well to constructive criticism from a potential investor, both during good and not-so-good times?

How would I anticipate a potential investor to react during critical junctions for the company, such as unforeseen emergencies, pivots or shifts in models, personnel issues, or in the event of M&A?

I intentionally framed these as four distinct categories with a series of questions, rather than answers, because (1) I certainly don’t have the answers, (2) each company and investor has their own context, and most importantly, (3) I believe it’s critical for both founders and investors to not become too influenced by the hype, celebrity, and game theory tactics around financings today. As a founder, you could scour the web to find at least 10 blog entries of every nuanced topic around fundraising, and while many of them are filled with rich information, the opportunity cost of focusing exclusively on fundraising for extended periods of time is not only emotionally draining, but oftentimes has real consequences for the company at hand. ironically, fundraising itself can be disruptive.

Truth be told, both sides of the table could stand to be a bit better. Investors could be better about clearly articulating what they’re looking for, their preferred style of engagement, the expectations they carry, and all the four dimensions listed above. Some individual investors do this remarkably well, though it becomes a tougher to evaluable when considering investment teams. And, founders could be stepping back from the noise and asking the simple, pointed, yet hard questions to hopefully get to the heart of what they truly want for their company. Of course, it’s hard to find one investment partner who legitimately can help a company on each and every dimension, so this reality forces founders to fundamentally examine which pieces are most critical to the trajectory of their business.

Series A today seems to be a confusing and anxious time for founders and investors alike, and for good reason. The sheer number of companies out there is hard to keep track of, and the capital available to early-stage companies shows no signs of fatigue. I’ve now seen a good number of founders struggle to fight through this milestone and, despite all of their preparation, weren’t able to identify, target, and pitch a set of investors that overlapped with their most beholden interests. Some could argue fundraising today has been reduced, in some ways, to a game, full of shared spreadsheets, databases, and circular email introduction loops — and both sides are to blame. With unlimited options, limited time, and a overarching fear about not connecting with the right investor or missing the next big thing, the result is what we have today, and occurs at the expense of finding what’s most important: the best founder-investor relationships.

I don’t use the word “relationship” lightly. At Series A, the investor who leads that round is likely to not only take a board seat in the company, but will be tied to the founders in a relationship so deep that the option of divorce is either unsavory or disruptive and painful. Therefore, perhaps framing a decision around a relationship that’s best for the company overall helps founders find their own signal through all the noise of fundraising.

And while the Series A investor relationship is one that’s hard to break away from after the fact, it is — as always — incumbent on founders to carry the burden of turning a bold vision into stark reality. It would be hard to imagine founders likes the Jeff Bezos of yesterday, Travis Kalanick today, or tomorrow’s superstar CEO expecting their investors to carry these critical burdens for their companies. Rather, it’s easier to envision these types of founders trying to leverage every connection, investment, network, and relationship to help confer unrealistic competitive advantages back to their companies. That may be, in fact, what ends up separating those few founders and companies at Series A from the pack, that their willingness and ability to tune out all the noise, all the advice, and all the spin — to instead step back and ask clear, pointed, high-level questions that track back to their business, in the hopes of finding that right relationship, a partnership that, in some way, will help them become what they truly want: to become a legend.

Footnote: In my mind, there are two blogs that provide founders with a the best library of clear, high-signal information around fundraising, covering everything from tactics to strategy: VentureHacks and Chris Dixon’s blog. Now, it’s no secret to mention these blogs in this light, but in the context of this post, I believe it’s worth underscoring.